Trump's New Tax Reform Likely Won't Help The Trade Deficit

Phil Levy
, ContributorI write about international economic policy, with a focus on tradeOpinions expressed by Forbes Contributors are their own.

U.S. President Donald Trump signs sweeping tax reform legislation into law in the Oval Office December 22, 2017 in Washington, DC. (Photo by Chip Somodevilla/Getty Images)

The tax law that President Donald Trump signed just before Christmas was intended to make U.S. businesses more globally competitive. Its signature feature was a lowering of the corporate tax rate from 35 to 21 percent. While that and other features of the new law may positively impact the desirability of doing business in the United States, the President has a particular fascination with the trade deficit. Does it follow that a boost to business incentives will move us toward balanced trade?

It can be difficult to get a clear picture out of much of the media coverage. There are detailed analyses of whether businesses will be less inclined to shift intellectual property overseas, for example, and how that alone could cut the trade deficit in half. Even on this one fact, other analyses cast doubt on the conclusion. The law changes so many things at once – from corporate rates to a repatriation tax to different depreciation rules to new individual rates – that it is exceedingly difficult to give a precise prediction.

And this column won’t provide one. Instead, here is a framework that may prove useful for drawing your own back-of-the-envelope conclusions. It centers on a national income accounting identity that states:

Savings – Investment = Exports – Imports

On the right side, we have the trade balance. On the left, we have some macroeconomic variables that seem particularly susceptible to the kind of tax changes just passed by the Congress and signed by the President. So, if we can say whether investment will go up by more than savings in the United States, we can say whether the trade deficit will increase.

Our first graph, courtesy of the St. Louis Federal Reserve, shows that net domestic investment in the United States has increased by more than 30 percent over the last five years. This does not adjust for inflation, but price increases have been relatively low and we’re talking about a relatively short time period.